News of Note
Inter-Leasing – Ontario Court of Appeal finds no GAAR abuse in structuring to access a property income exemption which reflected a deliberate policy choice
Email this ContentA plan to generate interest deductions in Alberta while enjoying a tax exemption on the corresponding interest income received by an Ontario affiliate (Inter-Leasing) depended on the interest income qualifying as income from property – which it did, given that essentially all Inter-Leasing did was to collect the annual interest coupons. Unlike Marconi, Inter-Leasing did not have specific corporate objects. The fact that earning the interest income came within its general objects was irrelevant.
Ontario's GAAR did not apply, as the exemption reflected a "deliberate decision not to tax corporations incorporated outside Canada on income from property," so that the statement in Copthorne, that "in some cases the underlying rationale of a provision would be no broader than the text itself," was apt.
Ontario corporate minimum tax was avoided by making the debts held by Inter-Leasing specialty debts and holding the deeds outside Canada. Pardu JA rejected a Ministry submission that she should apply the Williams (i.e., Indian Act exemption) "connecting factors" tests rather than the traditional private international law tests, to determine the situs of the debt, as the Williams tests are mushy, whereas the traditional common law situs tests can be clearly applied. (This approach also would "promote certainty" under Income Tax and Excise Tax situs tests, e.g., the situs under ITA s. 122.1(1.3)(b) of debt which is deemed real or immovable property.)
Neal Armstrong. Summaries of Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575 under s. 115(1)(a)(ii), s. 245(4) and Ontario Taxation Act - s. 54(2)(b).
CRA will not accept revenue-based methods for calculating ITCs if they do not reflect the relative taxable/exempt use of inputs for GST/HST purposes
In its memo dealing with input tax credit methodologies for registrants (other than financial institutions), CRA has expanded the discussion of the requirement in ETA s. 141.01(5) that the registrant’s method be "fair and reasonable," stating that this requires that the "particular method accurately reflects the purpose for which the property or service was acquired." It gives the example of a public institution which is mostly government-funded and is mostly engaged in making (free) exempt supplies, but makes minor sales which are mostly taxable rather than exempt. CRA considers that it would be unreasonable for the institution to use a revenue-based methodology to claim most of its HST costs as ITCs (i.e., on the basis that most of its sales were taxable.)
There's probably an audit story associated with this example.
Neal Armstrong. Summaries of Memorandum (New Series) 8-3 "Calculating Input Tax Credits" August 2014 under ETA – s. 141.10(5) and ETA – s. 169(1).
CRA requires filing of articles of dissolution before applying s. 88 to a wind-up
A lossco parent could not transfer losses to a profitco subsidiary under typical triangular loss-shifting techniques because profitco (which likely is a financial institution) is precluded from receiving a loan from lossco. Accordingly, lossco will engage in such techniques to transfer losses to a newco subsidiary (Aco), and then transfer Aco to profitco to be wound-up under s. 88(1.1) (see also 2013-0496351R3). Bizarrely, a representation was given that the interest-bearing loan by lossco to Aco (which has no assets) "will not exceed the amount that ACo could reasonably be expected to borrow from an arm’s-length financial institution."
Notwithstanding the favourable comments in IT-126R2, para. 5 on when a corporation is considered to have been wound-up, CRA ruled that s. 88(1.1) would not apply to the winding-up of Aco until articles of dissolution were filed. 2013-0496351R3 is similar.
Similarly to 2013-0504301R3, a provincial GAAR ruling was given.
Neal Armstrong. Summary of 2014 Ruling 2013-0511991R3 under s. 111(1)(a).
Avoiding a services PE by seconding employees to the source jurisdiction affiliate is very difficult to achieve
In a 25 February 2014 Head Office memo (2013-0475161I7), CRA indicated that if employees of a US company (USco) have been seconded to Canadian affiliates, their services are not counted in determining whether USco has either a construction site permanent establishment (Art. V, para. 3) or a services PE under para. 9 (since their activities now are those of the Canadian affiliates). In this regard, Nitikman notes, after discussing some Indian cases including Morgan Stanley, Centrica and Bamford, that "the case law suggests that a true secondment is difficult to achieve," as the employees invariably will want to maintain their benefits qua employee with USco (e.g., pension plan or insurance).
Nitikman disagrees with a statement in the memo that "if USCo does not have a [construction site] PE under paragraph 3 of Article V, then all of the services rendered in Canada, including those rendered at the construction site, can be considered when making a determination under paragraph 9" respecting a services PE, as this contradicts a statement of the US Senate Joint Committee staff (as well as other commentary) to the effect that "paragraph 9 does not apply to construction services that do not meet the requirements of paragraph 3 for permanent establishment."
Neal Armstrong. Summary of Joel A. Nitikman, "More on Services PEs – What is a Connected Project?," Canadian Tax Journal, (2014) 62:2, 317-82 under Treaties – Art. 5.
CRA rules that distributions made by a cross-border mutual fund trust to U.S. residents are exempt from withholding
All the distributions made by a listed Canadian mutual fund trust to its unitholders who are qualifying persons under the Canada-U.S. Treaty will not be subject to Part XIII tax. The distributions will be funded out of interest received by it on cross-border notes owing to it by the "US Opco" holding all its U.S. real estate assets and out of ROC payments made by US Opco to its Canadian holding company, which will be distributed as ROC payments by that Canadian holdco to the fund. The U.S.-source interest income will be exempted under Art. XXII, para. 2 of the Canada- U.S. Convention, which applies to income paid by a resident Canadian trust to a resident of the U.S. to the extent such income is "distributed out of income arising outside [Canada]."
Neal Armstrong. Summary of 2014 Ruling 2013-0509431R3 under Treaties – Art. 22.
CRA confirms that the “cost” of eligible capital property for thin cap purposes means its original cost rather than cost amount
Under the expanded thin cap rules, Canadian branches of non-resident corporations or trusts are limited to debt of 60% of the "cost" of assets used or held in the Canadian activities. CRA has confirmed that the "cost" of eligible capital property means its "original acquisition cost" rather than (amortized) "cost amount." It made essentially the same finding in 2013-0513761E5 respecting depreciable property.
A similar point arises under the gross REIT revenue definition, which provides for the deduction of the cost rather than cost amount of property which has been disposed of.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0526631E5 under s. 18(5) – equity amount.
Income Tax Severed Letters 6 August 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Individual taxpayers can destroy all written copies of their records
It is acceptable to CRA for you or other taxpayers to destroy all your receipts or other records provided that you take readable electronic copies and make appropriate backup copies.
Neal Armstrong. Summary of 17 July 2014 T.I. 2014-0526121E5 under s. 230(4.1).
CRA confirms that a group Finco is a listed financial institution for GST/HST purposes
CRA has revised and expanded its Memorandum on what is a listed financial institution for GST/HST purposes. New points include:
- The "insurer" branch of LFI also includes non-provincially licensed insurers such as accident and sickness insurers.
- The "money-lender" branch includes in-house Fincos (so that, for example, a group with a Finco could make s. 150 elections to eliminate HST/GST on intercompany lease or services charges).
- A person who is deemed by s. 149(3) to be an FI by virtue of an acquisition from an FI of what will be continued as its principal business is not thereby also deemed to be an LFI (unless it satisfies the specific criteria).
Neal Armstrong. Summaries of Memorandum 17-6 "Definition of ‘Listed Financial Institution’" July 2014 under ETA s. 149(1)(a) and s. 149(3).
CRA provides checklist on determining SLFI status for HST purposes
CRA has published a memorandum on the meaning for HST purposes of a "selected listed financial institution" – e.g., a mutual fund which is required to pay HST based on the provincial distribution of its unitholders rather than on the HST which is charged to it by suppliers.
Although mostly a paraphrase of the relevant provisions, the memo has an Appendix setting out a "series of tips" i.e., a checklist, to assist in determining SLFI status.
Neal Armstrong. Summary of Memorandum 17.6.1 "Definition of ‘Selected Listed Financial Institution’" July 2014 under ETA s. 225.2(1) – selected listed financial institution.